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15.02.2019 — Developer Does Not Need to Pay Rent for Land Plot If Local Authorities’ Omission Prevents Construction Thereon

The Supreme Court considered the dispute between the local authorities and the developer (the non-profit fund) in connection with the investment and construction contract concluded with the purpose of implementation of housing development program. The Fund did not pay rent for a certain period of time, arguing that the local authorities created obstacles to complete the construction. The Supreme Court indicated that if the actions of the local authorities indeed made construction on the land plot impossible, then the fund is not obliged to pay the rent for the land plot leased from the authorities, because it is impossible to use it for its intended purpose.

In recently adjudicated case No. А40-170498 / 2017 the local authorities and the developer concluded the investment and construction contract for the construction of residential buildings, as well as the land lease agreement. The developer did not pay the rent for a long time, and the local authorities terminated the lease agreement in court. After that, the local authorities filed a lawsuit to recover the debt under the lease agreement.

The courts of three instances sided with the lessee, because they were concerned that the illegal omission of the administration created obstacles for completion of the construction, namely, the failure to issue the amended design specification, the failure to prolong the construction permit had deprived the lessee of the possibility to use the land for intended purpose (for the construction of residential buildings). Therefore, the lessee cannot be obliged to pay the rent in accordance with Art. 328 of the Russian Civil Code.

The Supreme Court drew attention to the fact that the lower courts had not investigated sufficiently, whether the case files proved that the lessee could not use the leased land during the period in question due to the illegal actions of the lessor. In particular, the courts did not take into account that the illegal inaction of the administration took place in 2014–2015, but in the period indicated in the lawsuit (2017) the lessee had a valid construction permit, however the construction was suspended on the initiative of the lessee, and he did not take measures to continue the implementation of the project. With these instructions the Supreme Court reversed the decisions of the lower courts and sent the case for a new trial.

 

14.02.2019 — New US Sanctions Against Russia

On February 5, the US Senate voted for the Strengthening America’s Security in the Middle East Act that introduced new sanctions against Syria and its allies, including Russia and Iran. In addition, on February 13 senators introduced the Defending American Security from Kremlin Aggression Act in the US Parliament that supports NATO countries and introduces new sanctions against Russia.

The Strengthening America’s Security in the Middle East Act adopted on 5 February aims to protect Israel from the economic boycott and introduces new sanctions against Syria, as well as all its business partners, including Russia and Iran. In the first place the Act affects the supply of aviation equipment and spare parts, as well as the oil trade.

In addition, on 13 February, the Defending American Security from Kremlin Aggression Act was introduced in the US Parliament, aimed at increasing economic, political and diplomatic pressure on Russia in connection with the events in Syria and Ukraine, including the incident in the Kerch Strait. The Act provides for new sanctions against Russian banks, gas and energy projects, Russian sovereign debt, the cyber sector of the Russian economy, as well as a number of Russian politicians and oligarchs. Senators describe the set of measures as the most rigorous measures ever adopted by the United States. The threat of sanctions caused weakening of the Russian Ruble exchange rate and decrease of prices of the shares of some Russian companies at the Moscow Stock Exchange.

13.02.2019 — Supreme Court Clarified Controversial Issues of Changing Type of Permitted Use of Land Plots

The Presidium of the Supreme Court approved a new Digest of case law concerning the change of the types of permitted use of the land plots. In this Digest, the Supreme Court explained in which cases the owner or tenant of the land plot can choose the type of permitted use independently, change it, as well as the difference between the main and additional types of permitted use.

In the Digest of case law the Supreme Court indicated that the owner of the land plot can choose the main and additional types of permitted use of the land plot in accordance with the city-planning regulations independently and without additional approvals from the local authorities. However, additional type of permitted use can only be chosen in addition to the main one and only within one land plot.

The Supreme Court once emphasized that it is not allowed to change the type of permitted use of the land plot, if this leads to circumvention of the tender procedures established by law. In particular, if the plot was provided for the purposes of construction, then the lessee does not have the right to change the parameters of the facilities being constructed on the land plot without additional tender procedures. In addition, in the Digest the Supreme Court explained that the change of the type of permitted use is possible only if it does not lead to the violation of the city-planning regulations in terms of the minimum and maximum size of the land plots and the parameters of the permitted construction established therein.

12.02.2019 — Case Law Review on Arbitration: Optional Arbitration Clauses and Arbitrability of Disputes With Public Element

The Supreme Court issued a Digest of case law that included legal positions on the most topical issues concerning state court’s collaboration to and control of the arbitration courts and enforcement of arbitral awards. In particular, the Supreme Court considered the issues of the admissibility of asymmetric optional arbitration clauses, the finality of the arbitral award and the arbitrability of disputes with public element.

In respect of the formulation of the terms of arbitration agreements in the Digest the Supreme Court confirmed the validity of optional arbitration clauses provided that they are symmetrical, that is, giving both parties the equal right to choose to refer the dispute to a state or arbitration court. If the clause is asymmetric and grants such a right only to one party, then it is invalid as far as the rights of the other party are limited. In this case, each of the parties to the contract has the right to appeal both to the court and to the arbitration court.

The Digest also clarifies that the right to challenge the arbitral award can only be excluded by express and obvious agreement of the parties on this matter, namely, if they include the appropriate clause on the finality of the arbitral award directly in the text of the arbitration agreement. The reference to the Arbitration Rules containing the same clause will not be sufficient. At the same time, the clause on finality deprives the party of the right to challenge the decision in the state court, but does not deprive the right to object to its enforcement in fact on the same grounds, including in view of the violation of public order, which the court understands quite widely.

In respect of arbitrability of the disputes the Supreme Court once again emphasized that the disputes arising out of public relations cannot be referred to arbitration courts (in particular, disputes over privatization, public procurement). In other situations, in particular, when there are the disputes arising out of the contracts with public element, the courts also have the right to protect the public order. The Digest provides an indicative list of such elements of public order, in particular, property owned by public legal entities, relations in the field of bankruptcy, the state contract system, fair competition, custody and guardianship, and also if the dispute involves “expenditure of budget funds”. At the same time, the courts interpret this term quite broadly and may refuse to enforce the arbitral award on the basis of non-arbitrability of the dispute, in particular, if the defendant is a company whose final beneficiary is the Russian Federation, therefore the levy of execution upon its property can cause damage to the budget of the Russian Federation as a result of the withdrawal of funds to the accounts of foreign companies (see case No. A40-117331/18).

 

11.02.2019 — Supreme Court Included Intra-group Loan In Register of Creditors’ Claims of Insolvent Debtor

In a recently adjudicated case the Supreme Court elaborated criteria for refusing to include the claims of the company’s shareholders in the register of insolvent company’s creditors’ claims along with other creditors. The Supreme Court emphasized that, as a general rule, the legislation does not provide for the subordination of affiliated creditors’ claims to those of external creditors, and the mere fact that the debtor’s shareholder is also its lender does not amount to the corporate nature of the claim and cannot be a ground for refusal to include his claims in the register of creditors’ claims.

In the case No. А81-7027/2016 the Court declared bankrupt the company that owns large shopping malls. To construct these malls the company borrowed money from Sberbank, and the terms of this loan limited the company’s right to borrow money from external lenders. Since it was impossible to attract funds from other sources, the company’s founder issued a special-purpose loan for the construction of shopping malls amounting to Rubles 685 million. After the company was declared bankrupt, the founder requested to include this debt in the insolvent company’s register of creditors’ claims.

The court of the first instance dismissed the shareholder’s claim and argued that the shareholder had created the “artificial money turnover” between himself and the company as affiliates as a result of concessional long-term financing in the form of loans. The court also declared that the shareholder’s actions constituted an abuse of right (Article 10 of the Civil Code of the Russian Federation), aimed at increasing debts of affiliated lender despite the fact that the company was already in default under the obligation to repay the loan to Sberbank in time.

At the same time, the court of appeal granted the claim with reference to the fact that under the terms of the loan agreement with the bank, the company was not able to attract money from other investors, and the shareholder was unable to finance the company through the share capital increase due to corporate conflict with another shareholder. The court of cassation reversed the decision of the appellate court and agreed with the arguments of the court of the first instance.

However, the Supreme Court sided with the appellate court. At that, the Supreme Court drew attention to the fact that during the examination of the affiliated persons’ claims in bankruptcy, the courts in each particular case should investigate the legal nature of their relationship with the debtor, the aims and sources of financing, the economic feasibility of issuing intra-group loans and other circumstances. The Supreme Court explained that such claims shall not be included in the insolvent company’s register of creditors’ claims only when the loan hided the increase of the authorized charter capital or when the funding was provided to an insolvent debtor as part of the implementation of a publicly undisclosed plan to restore its financial solvency, in case such a plan failed. At the same time, the creditor who objects to including the respective claims in the register must prove that the shareholders’ actions were indeed aimed at artificially increasing the insolvent company’s debt. Since in this case the bank has not provided such evidence, the Supreme Court included the shareholder’s claims in the insolvent company’s register of creditors’ claims (see Decision of the Supreme Court No. 304-ES18-14031 dated 4 February 2019).